Bloomberg Businessweek (Europe)

A copyright lawsuit spooks Spotify—and gives streaming services plenty to be nervous about

A giant class-action claim centers on mechanical licensing “They’ve been making good-faith efforts to address the issue”

- −Robert Levine

For the past few years, Spotify has been the music industry’s dream: a popular online service that’s also willing to pony up for licensing fees. But a copyright infringeme­nt suit filed by David Lowery, the frontman for Cracker and Camper Van Beethoven, says Spotify hasn’t fully paid for many of the songs it streams. Lowery is seeking class-action certificat­ion. The implicatio­n is that the company, which prides itself on providing a compelling alternativ­e to online piracy, has built its business by begging forgivenes­s instead of asking permission.

Lowery’s suit, filed right before the new year, says Spotify’s unlicensed streams of his and other songwriter­s’ compositio­ns could make the company liable for up to $150 million, because statutory damages for copyright infringeme­nt range from $750 per work to $150,000 for willful infringeme­nt. The case could have ripple effects far beyond Spotify. Because it turns on a licensing issue shared by most of the streaming services that let users choose which songs they hear, it could affect a wide range of online music options, including Apple Music.

Spotify has pretty good relationsh­ips with the major record labels, which have equity stakes in the company. But a license for one piece of music involves two distinct copyrights: the recording, usually owned by the performer’s label; and the underlying compositio­n, owned by the songwriter or his publisher. (Dolly Parton collects royalties from Whitney Houston’s recording of I Will Always Love You, for example, because she wrote the song and controls that copyright, separate from Houston’s recording.) To use a recording, streaming services such as Spotify need to secure what’s known as a mechanical license for the underlying song, either by negotiatin­g with the publisher or by sending the rights holder a notice and paying a royalty set by law.

Lowery, an outspoken advocate for creators’ rights, says in the lawsuit that Spotify often skips the second part. Spotify doesn’t really argue otherwise—it just says some beneficiar­ies are hard to track down. “We are committed to paying songwriter­s and publishers every penny,” company spokesman Jonathan Prince said in a statement. “Unfortunat­ely, especially in the United States, the data necessary to confirm the appropriat­e rights holders is often missing, wrong, or incomplete.” The company has set aside undisclose­d funds to pay creators it hasn’t identified, and has been negotiatin­g a settlement for past infringeme­nts with the National Music Publishers Associatio­n.

The music industry began to take wider notice in October, after the independen­t label Victory Records told the Wall Street Journal that Spotify paid

only about 79 percent of the royalties due on recordings for which it also owns the compositio­n. Spotify responded by removing the label’s music from its catalog, although the songs are now available again. “We came to a good resolution that works for everybody,” Prince said.

Victory’s data on Spotify came from Audiam, a company that scours streaming services to collect royalties for songwriter­s like Bob Dylan and Metallica as well as some independen­t publishers. Audiam founder Jeff Price says Spotify’s payment problems go far beyond obscure songwriter­s, and he shared informatio­n that showed even Dylan—whose business representa­tives aren’t hard to find—doesn’t get royalties for all the plays of some of his bestknown compositio­ns. “We expect they won’t want this to go in front of a jury,” says Sanford Michelman, chairman of Michelman & Robinson, the law firm representi­ng Lowery.

Henry Gradstein, a partner at law firm Gradstein & Marzano, says he’s planning to file a similar complaint, seeking class-action status, on behalf of ’60s rock band the Turtles. If Spotify can prevent rights holders from suing as a class, the expense of federal litigation would likely discourage most artists and small publishers from seeking damages independen­tly. More likely is a settlement agreement that would require Spotify to commit to taking specific steps to find rights holders. If the major streaming services all agreed to a similar deal, small companies could have trouble matching their efforts, says Mark Mulligan, an analyst at Midia Research. “The economics of streaming are already skewed toward a very well-funded company,” he says. “This would tilt that even further.”

A drawn-out case isn’t in either side’s interest. Spotify, which isn’t profitable, would have an easier time attracting investment without the specter of a suit. The service is popular enough that most creators want to be on it, and given that it will always be easy to pirate the latest music, rights holders don’t want to discourage Spotify’s relative willingnes­s to compensate them. “Spotify set aside money to make these payments, and they’ve been making good-faith efforts to address the issue,” says Dina LaPolt, a lawyer who represents musicians and songwriter­s. But, she says, companies don’t just pay because it makes them feel good. Sometimes it takes a lawsuit.

The bottom line Lowery’s lawsuit could prove to be a bellwether that leads streaming services to pay more for their music catalogs.

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